The Australian Dollar (Currency:AUD) is the outperformed on global currency markets on Tuesday:

The pound to Australian dollar exchange rate is 0.85 pct in the red at 1.7226.
The Australian dollar to pound sterling is thus at 0.5805.

PS: The above are spot market quotes, your bank will add a discretionary spread to the figures. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.

"The AUD is the top-performing currency on the session so far, reflecting above-consensus gains in retail sales (+0.4%) plus the RBA’s decision to keep rates on hold and maintain a neutral policy bias (risk seen of a move to dovish ahead of the meeting)," says Shaun Osborne at TD Securities.

Australian retail sales improve

After stagnating in June and barely growing in July, total sales rose by 0.4% in August (consensus: 0.3%).

"This was the fastest growth since sales posted 1%-plus increases in January and February, and was driven by a rebound in volatile department store sales (these rose by 6% after falling by 8% in July, which could indicate problems in seasonal adjustment)," says Kieran Davies at Barclays.

Other categories of sales were mixed – household goods fell by 0.6% and other goods dropped 0.2%, while food sales were up 0.1%, clothing increased 0.3% and cafes, restaurants and takeaways rose by 0.4%. Over the past year, total sales are up only 2.3%.   

Davies says the RBA would probably be happy with the tentative pickup in retail sales, with rising consumer confidence and the recovery in the housing market pointing to some further improvement over the rest of the year.

RBA leaves rates on hold

The primary driver of the Australian dollar today is the decision to leave interest rates unchanged; and indications suggest that rates could be on hold for the remainder of the year.

A statement released by the central bank read:

·       There has been an improvement in indicators of household and business sentiment recently, though it is too soon to judge how persistent this will be (implication: wait and see); and

·       The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through and will be for a while yet. There is also continuing evidence of a shift in savers’ behaviour in response to declining returns on low-risk assets (implication: monetary policy is working. The growth outlook would need to change substantially to require a further move in rates in the near-term).

ANZ Bank now see an interest rate cut in February

We hear from ANZ Bank who have today had to push back their forecasts for an interest rate hike at the RBA.

ANZ continues to keep one further interest rate cut in its profile (now in February) believing that a continuing rise in the unemployment rate and the substantial drag from weaker mining investment keep open the option that the RBA takes out some further insurance (though it would be preferable if the AUD fell further instead).

"More broadly, ANZ believes that we are close to the low in the Australian cash rate cycle, given the improving housing sector, better global growth news and accommodative monetary policy," says Ivan Colhoun at ANZ Research.

The wind back in mining investment, however, is expected to see Australian interest rates remain at a relatively low level throughout 2014.